For PayPal, a New Deal Extends Its Link to eBay Even As It Seeks Out Other Marketplaces

PayPal Holdings Inc. on Wednesday said it has reached an agreement with its former owner, eBay Inc., that calls for PayPal to act as a checkout method on eBay for three years beyond the end of the five-year pact that separated eBay and PayPal in 2015. In that three-year period, however, PayPal says it will not process non-PayPal transactions for the big marketplace.

As contemplated in that 2015 operating agreement, PayPal will also be free as of July 2020 to start processing for eBay competitors, something the agreement’s terms prohibit it from doing now. “We now have the opportunity [as of 2020] to partner with the largest and fastest-growing marketplaces in the world,” said PayPal’s chief executive, Dan Schulman, during a conference call with analysts to discuss the company’s fourth-quarter and full-year 2017 results.

Meanwhile, news broke late in the day Wednesday that eBay had struck an agreement with Adyen, a Netherlands-based processor with operations in the United States, to begin processing eBay transactions in North America this year and gradually take over the bulk of its volume by 2021. The deal, which indicated eBay has ideas of its own about distancing itself from its long-time relationship with PayPal, sent PayPal’s shares downward in after-hours trading.

Most of the questions following the prepared remarks by Schulman and other PayPal officials concerned the new deal with eBay, but Schulman demurred when one analyst asked directly which marketplaces PayPal might work with.

Schulman: “We now have the opportunity [as of 2020] to partner with the largest and fastest-growing marketplaces in the world.”As for the three-year pact running to 2023, Schulman said the so-called branded business on eBay—processing strictly for PayPal transactions—is a more profitable role than its current position as the so-called merchant of record, in which it processes both branded and other forms of payment. “We felt the unbranded piece of this business did not make sense for us,” he told the analysts.

Already, eBay, which owned PayPal for 13 years until the 2015 spin-off, is mattering less and less in PayPal’s mix of business. All told, eBay accounted for 13% of PayPal’s volume last year, down from 19% in 2015. By July 2020, PayPal expects that share to drop to 4%.

For the year, PayPal finished with $451 billion in payment volume, up 27% from 2016. Just over one-third of this volume came from mobile devices, a channel that grew fully 52%, PayPal said. The company derived $35 billion of that business from Venmo, its popular peer-to-peer transfer app, representing 100% growth over Venmo’s 2016 volume.

Accounts, including some 18 million merchant accounts, totaled 227 million, up 15%, while 29.4 million net new active accounts came onboard, a record number. The company added 8.7 million of these new accounts in the fourth quarter.

For the quarter, volume totaled $131 billion, up by nearly one-third over the year-ago period. Transactions per active account, an engagement measurement PayPal watches closely, came in at 33.6, up from 31.1 year-over-year.

But PayPal’s transaction take rate, which measures how much the company earns on each transaction, continued to sag in the quarter, finishing at 2.45%, down from 2.63% a year earlier. John Rainey, PayPal’s chief financial officer, blamed the growing popularity of Venmo for some of the take-rate erosion. Venmo transactions carry no fees, though a new service called Pay With Venmo allows PayPal to collect merchant fees for Venmo payments at stores.